Lenders Warm to Student Housing

Lenders are finally developing an appetite for student housing deals, but the variables like location, university, and even the time of year play a role in what you can get. (Wonder if they're this picky about what they eat?)

1. Acquisition vs Construction

Walker & Dunlop managing director Stephen Farnsworth tells us lenders are more amenable to underwrite acquisitions today. Lenders are receptive to underwrite on stabilized properties because they have a seasoned income stream and NOI. Often, lenders want a stabilized property before committing to permanent debt. New construction loans, however, are more difficult to get because lenders want to be sure the developer and operator have experience in the student housing market. It’s also easier in bigger markets with similar properties to compare operation variables or with an operator with a portfolio of similar assets. That track record can play a big role. 

2. Location

Lenders look for proximity to campus, 12-month leases, pre-leasing ocupancy, size of the university, and the timing of your income stream, Stephen says. A project in Orlando at Central Florida University will get a different cap rate than a similar one in at the University of Texas in Austin, Texas. Stephen’s team structured a $33M 10-year fixed-rate term, with four years interest only at 80% LTV under Freddie Mac’s Capital Markets Execution program for repeat sponsor, Pollack Shores acquired the 336-unit Arden Villas student housing complex in Orlando near CFU, where they already own and operate similar properties. The interest rate was locked when the 10-year US Treasury was at a then 12-month low of 2.50% with an early rate lock execution, Stephen says. “The sponsor is familiar with the marketplace, the university is doing well, and the apartment market was strong,” he tells us.

3. Seasonality

Because student housing occupancy fluctuates with the school year, it can influence the kind of rates and type of capital you’ll get, Stephen tells us. “We don’t see as many student housing deals get financed in spring months because of declining income as they’re wrapping up the school year and physical occupancy is often declining, so the lender focus is on pre-leasing for the fall,” Stephen says. The risks: shooting too high on target rents or failing to lease up. August and October are often the strongest months to get financing because properties should be full if you’re properly operating the community and the market is solid, he says. Away from work, Stephen likes to spend time with his wife and three boys ages 2, 4, and 6.